Direxion Shares Exchange Traded Fund Trust closed up with 7.09% gains at $85.51 on Tuesday as gold holds steady ahead of the policy statement from the U.S. Federal Reserve today. The bullion trade has been somewhat quiet since Monday because investors were awaiting the outcome of the Fed April policy meeting ending today and the Bank of Japan policy meeting on Thursday. The main reason investors are concerned about central bank policy meetings is the issue of interest rates.
Interestingly, gold ended Tuesday on a slightly positive note that suggests that investors are leaning towards the bullish bias even though they are not aggressively pushing a rally in the yellow metal. On Tuesday, spot gold was up 0.3% to $1,241.66 an ounce and U.S. gold futures for June delivery closed with 0.3% gains at $1,243.40 an ounce. Gold has been on a strong rally in 2016 and gold was the best performing commodity in the market during the first quarter.
Fed policy statement is likely to push gold higher
Low interest rates tend to be positive for the yellow metal because the bullion is a better store of value and it doesn’t make much sense to put money in other low-risk assets if the interest rate is low. High interest rates tend to be bad for bullion and the fed has plans to raise interest rates this year. The consensus is that the U.S. Federal Reserve won’t be raising interest rates in April but market watchers think that a June rate hike is plausible.
Interestingly, the support from the bullish side is pushing gold higher in European trade this morning. Spot gold was up 0.2% to $1,245.80 an ounce as at 10:00 GMT – we can expect the rally to continue when U.S. markets open and Direxion Shares Exchange Traded Fund Trust could boast more gains. Jens Pedersen, senior analyst at Danske Bank notes that “The gold market is on hold before the Fed meeting … but nobody thinks the Fed will hike rates today and June is hardly an option, which should be negative for the dollar and positive for bullion.”
April rate hike unlikely and June rate hike is uncertain
One of the major drivers of the upward bump in the bullion and Direxion Shares Exchange Traded Fund Trust yesterday and today is the weaker than expects U.S. durable goods data. The data suggests that the recovery in the U.S. economy is not as strong as the March jobs report would want us to believe; hence, the fed will be cautious about raising interest rates. Suki Cooper, an analyst at Standard Chartered says, “I think risks are rising for the Fed to maintain a dovish view, and that’s going to set quite a positive background for gold prices… Our economist are looking for rates to remain unchanged this week.
If the fed doesn’t raise interest rates in April, most investors expect the rate hike to happen in June. However, despite the general market expectations that the Fed will raise interest rates in June, Mark O’Byrne, research director at GoldCore in Dublin investors have nothing to worry about interest rates in the next couple of months.
In his words, “We believe the recovery in the U.S. is more fragile than is acknowledged and the expected rate hike in June may not happen… This would be supportive of gold as it would underline how ultraloose monetary policies are set to continue for the foreseeable future.”